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May You Live in Interesting Times

Years ago, Barataria predicted that 2017 would be “The Year Everything Changes”. The lesson is, of course, that we all need to be careful what we wish for.

The basic underlying forces which drove that prediction have not changed. The holiday shopping season has yet to be fully tabulated, but it appears that the robust 3.6% gain predicted was met or even matched, with one estimate showing a 4.9% gain. Baby Boomers will still hit retirement age and there will definitely be a shortage of workers coming up, especially in certain skilled areas.

For all that hope, the upside will be limited by an incoming Trump administration. It’s not just that they are largely tied to political views which do not fit the situation, it’s that many of them have little to no experience making policy. To a large extent, nothing will get done. But what does get done will happen among the bureaucracy. That may mean more change than we all think.

Searching for answers is one thing, searching for the right questions another

Searching for answers is one thing, searching for the right questions another

One of the key features of the last eight years or so has been the inability of “experts” to manage the financial crises in any meaningful way. Of course they did try, and in some ways did a valiant job all the same. This recent Managed Depression was not as bad as the Great Depression or even the Long Depression, the previous two of the roughly five that have occurred in US history.

But it was a Depression all the same. And that confounded the experts.

The rise of populism, as in “drain the swamp!” has a lot to do with a lack of engagement by the expert class. I have had the great pleasure of private conversations with analysts and economists recently, and I have to report that after a few beers they all said the same thing. “We have no idea what is going on,” I was told. The royal “we” came easily as they all spoke for their class. It was one Hell of an admission.

Want proof? Take a look at how many papers on economics were written annually before 2008 versus today. You’ll find that there are about half as many. No one has confidence in their analysis.

Gita Gopinath

Gita Gopinath

That’s why this particular conversation with economist Gita Gopinath of Harvard is illuminating. While she has achieved a seat at one of the great halls of expertism, as a young woman from India she is without any doubt an outsider. Her views on the world take on the establishment with the flair and verve you would expect from someone like her – data driven and quietly revolutionary.

Turn young economists like Gopinath loose and great things may yet happen.

There is a lot in this article to digest, but much of it goes against conventional wisdom. The rest provides a good roadmap for a world more tightly integrated than ever before. Most significantly, she outlines what nations can do in a world defined by free trade – and it’s not engage in a currency war based on trashing your own paper.

So what we analyzed in our paper is a set of fiscal instruments that would deliver the same outcomes as a currency devaluation. This idea goes back to Keynes, as you said, who proposed import tariffs and export subsidies as a substitute for currency devaluation. Given the illegality of using tariffs of this nature, we instead explored the role of value-added taxes and payroll subsidies or, more specifically, raising value-added taxes and cutting payroll taxes. What we found, surprisingly, is that this form of intervention did extremely well in mimicking the outcomes of a currency devaluation, not approximately but exactly.

Ideas usually come to those who are busy working, actually.

Ideas usually come to those who are busy working, actually.

Is there an alternative to tariffs and devaluation? Yes, there is! Reducing payroll taxes, or really the entire overhead per employee, has been shown with real data to encourage exports as effectively as a devaluation. And an increase in Value Added Taxes (VAT) slows imports more quickly than domestic production.

You may say, “But we don’t have a VAT in the US!” And you’d be right. But as part of a general overhaul of the ridiculous corporate tax code we may yet get such a thing here in the US. As per Barataria’s general rule of economics, each party has an amazing ability to be half-right about nearly everything.

Of course, we still need a reduction in overhead. And we still need steps to reduce income inequality, something which only gets worse with a shift to a VAT based system. We can’t say that what is being proposed is the entire answer, and the lack of balance coming in means we still won’t go where we need.

Yet there is hope. The bureaucracy, fueled by new talent, may have the tools to understand and shape what is happening. The “experts” have finally turned the corner and appear to stand ready to be refreshed by new thinking.

Things aren’t going to be as bad as we all feared. The path to nothing fast will be the slow path to something good. And that’s worth noting as we head into the next year when, for better or worse, things really are going to start changing.

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10 thoughts on “May You Live in Interesting Times

    • Nothing surprising at all. But keep in mind that a new generation of economists and other experts is essential to bring the new thinking, so it does take a while to really sink in.
      Not only a new generation but a new gender and country of origin in many cases. This is what genuine “outsiders” look like.

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